FIIs Short Nifty Futures Amid Rising Uncertainty

Lack of clarity on cap gains tax and RBI policy rates triggers worries

 Faced with lack of clarity on whether share sales by overseas investors will attract capital gains tax, uncertainty surrounding policy rate action by the central bank and quarterly results next month, foreign institutions have been building up short positions on Nifty index futures. 

Data since last Friday shows that a decline in Nifty futures premium over its underlining, the Nifty 50, has been accompanied with a buildup in open interest, or outstanding positions, indicating creation of bearish bets. Nifty futures hit a monthly low of 5171. They have declined steadily from 5285 last Friday to 5197 on Wednesday. Simultaneously, open interest by FIIs has increased from 5.99 lakh contracts to 7.48 lakh over the same period, indicating sentiment is negative. 

"FIIs are playing the markets cautiously ahead of the imminent RBI policy meet and how corporate results play out next month," said Karun Mutha, senior VP & head equity and derivatives advisory, HSBC InvestDirect, said. "They have been building short positions in index futures, indicating that domestic events will be key determinants of market direction, going forward." The Union Budget for fiscal 2013 (April-March) introduced legislation that will, under certain conditions, deny double taxation treaty benefits to foreign institutions routing their money through Mauritius. Fears that these investors will sell their Indian stock holdings following the new rule has negatively affected sentiment. 

That apart, FIIs are treading cautiously ahead of the RBI monetary policy meeting on April 17 amid concerns the central bank may not cut rates given that the government has frontloaded its borrowing programme for the next fiscal year. 

"The undertone in the Indian market remains nervous and a fresh bout of selling is not ruled out. At the same time, upside seems capped from here given the plethora of problems the Indian market is confronting," Amar Ambani, research head of India Infoline. The 200-DMA for Nifty at around 5160 will be closely watched, said Ambani. Monal Desai, head-institutional equities (derivatives)—Prabhudas Liladher, said many foreign investors could have sold Nifty futures to hedge their stock portfolios. A few derivatives strategists feel that the build-up in index futures OI has been caused by index arbitrageurs who are shorting Nifty against the purchase of a basket of stocks. 

"At least 70% of the short positions should be from arbitrageurs," said TS Harihar, head — institutional derivatives, ICICI Securities. 

ram.sahgal@timesgroup.com